4 Ways Smart Contracts Can Make Insurance Purchases Easier

Smart contracts could very well be the future for commercial insurers. So how can this technology make the claims process easier?

Smart contracts will one day boost automation in the insurance process. The retail market is already working on it, but will the technology change the way commercial insurance operates as well?

A report commissioned by Lloyd’s of London strives to answer this question. Here are four ways that, according to the authors, smart contracts can make risk managers’ lives easier:

1) Quicker and Cheaper

In short, smart contracts are agreements between parties where words are replaced by code, so that they can be automatically read by computers.

As a result, the obligations set out in the contract are automated and can be self-executed.

For insurance buyers, that means depending less on the interpretation of clauses by loss adjusters and lawyers as indemnifications will be paid once objective criteria are met.

The whole process will thus be quicker and cheaper, possibly resulting in lower premium rates. It could also help insurance companies to fill coverage gaps by learning more about the risks faced by corporate buyers.

2) Enhanced Underwriting

The Lloyd’s report stresses the importance of data collected by companies that implement smart insurance contracts when it comes to improving underwriting processes.

In order for the whole thing to work, data must be provided by respected third parties, like meteorological agencies, or by reliable gadgets, like weather stations and cargo sensors. Information is added to contracts via safe, shared distributed ledger systems such as blockchain.

With this wealth of information in their hands, carriers should be able, with the time, to make better risk assessments and to price their coverage more accurately.

Smart contracts could also automatically adjust premium rates if conditions faced by the insured asset changes.

For example, ships that want to cut travel times may choose to pay higher rates for their marine insurance coverage and pick a route with higher piracy risks. The smart contract, in this case, would adjust the rate automatically and make the new charge directly into the client’s account.

And information about buyers themselves will be more plentiful, speeding up the analysis performed by carriers during the underwriting process.

3) Less Pain With Claims

For insurance buyers, however, the most attractive feature of smart contracts is the tantalizing possibility that, one day, their claims will be paid automatically without all the hassle they have to endure today.

Smart contracts can be linked to parametric insurance coverages, which already promise to pay claims if some pre-agreed triggers are met.

The idea is that, once the coverage is triggered, the smart contract already proceeds to pay the indemnification, with no need for loss adjusters to get in the mix or even to contact the carrier.

In addition to that, in layered programs, payment by followers would be automatically made once the lead carrier approves the claim.

The report concedes that this kind of improvement only looks realistic to high volume, small value claims. These claims, however, amount to 85% of all Lloyd’s claims, and plenty of headaches for risk managers.

But they can also play a role in high value, complex claims that will always require human adjustment. In this case, smart contracts can send automatic alerts to the different parties involved whenever action needs to be taken.

4) Combating Fraud

Another benefit of smart contracts could be the reduction of insurance fraud.

In theory, they can be implemented with different computer technologies. But the tendency is that they are integrated into distributed ledger systems such as blockchain, which main premise is that every change in the contract is permanently recorded. This reduces the risk that participants in the contract might try something funny and avoid detection.

Also, data from past claims will be readily available to help identify non-conformity in the fast-moving claims handling process.

The Challenges Ahead

Smart contracts can introduce important enhancements to the insurance process, but the report stresses that some challenges still need to be tackled before their benefits reach buyers.

First of all, there is no international regulation specific to smart contracts, which could raise issues in coverage particularly in civil code jurisdictions, which is the case of most EU countries. Data privacy is another sticky point.

It is also not clear how the insured will be able to defend their views if they do not agree with an automatic decision not to trigger a coverage. Lloyd’s acknowledges that a mechanism needs to be crated to address potential problems linked to the self-executing character of the contracts.

And not all kinds of risks are liable to be framed into a smart insurance contract. So far, the most promising options are those that can be covered by parametric insurance, which already offer a significant degree of automation.

Telematics technology could create opportunities in areas like aviation insurance, cargo and agriculture. But the report forecasts that, for a while, smart contracts are more likely to complement traditional ones, executing simpler tasks like the collection and distribution of premiums, particularly in the case of complex risks.

Lloyd’s also see more potential to implement the technology on treaty reinsurance, that can be more easily standardized, than on facultative contracts, which can be more varied in form and substance. &

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.